Standing Committee F

[Mr. Roger Gale in the Chair]

Finance Bill

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38){**qc**}

Roger Gale: I apologise that the centre door is locked and any inconvenience that may have caused. It is being unlocked as I speak. I understand that the Committee has made rapid progress.Clause 30 Charge and main rate for financial year 2003

Clause 30 - Charge and main rate for financial year 2003

Howard Flight: I beg to move amendment No. 7, page 22, line 3, at end add—
'(2) In respect of that and subsequent financial years, if the retail prices index for the month of September preceding a financial year is higher than it was for the previous September, then, unless Parliament otherwise determines:
(a) section 13(3) and section 13AA(4) of the Taxes Act 1988 (''the relevant provisions'') shall have effect for that year as if for each of the amounts specified in the relevant provisions as they applied for the previous year (whether by virtue of this section or otherwise) there were substituted higher amounts;
(b) such higher amounts shall be arrived at by increasing the respective amounts for the previous financial year by the same percentage as the percentage increase in the retail prices index; and
(c) if the results are not (in the case of section 13(3) of the Taxes Act 1988) multiples of £10,000 or (in the case of section 13AA(4) of the Taxes Act 1988) multiples of £1,000, rounding them up to the nearest respective amounts which are such multiples.'.
 I welcome you to the Chair, Mr. Gale. We now come to more technical clauses and schedules. We have done our best, with the support of lawyers and the Clerks, to draft our amendments correctly. I apologise if they are not perfect, but the points are there to be made. 
 We welcome the latter provisions in clauses 31 and 32 to assist smaller businesses, but amendment No. 7 covers the obvious point that without indexation of smaller-company tax rates, the reality in trading and profitability terms is that the size of businesses that qualify for those tax rates will become smaller and smaller. Not to index them is a form of stealth tax if one believes in giving smaller companies fiscal advantages. Amendment No. 7 is straightforward and would index the limits by reference to which mainstream and starting rate corporation tax is calculated, so avoid the inadvertent effect that I have described.

Dawn Primarolo: I welcome you, Mr. Gale, to our proceedings.
 It can be taken as read that it is difficult in Opposition to draft amendments and I accept the caveat of the hon. Member for Arundel and South Downs (Mr. Flight), although we may sometimes have fun with some of the wording. [Hon. Members: ''When?''] Now. [Laughter.] It depends on how well we get on. 
 I shall explain why I am not attracted to the amendment. As I understand his underlying point, the hon. Gentleman wants to ensure that the number of small companies qualifying for the lower rate should continue to receive the Government's attention once they have started up and are growing. Putting the most generous spin on his comments, I imagine that he is expressing a hope that this is not a once-and-for-all, set-in-stone provision that would diminish in time if all new companies were successful. I assure him that our commitment in setting corporate tax levels for small and medium-sized as well as other companies is designed specifically to assist with other tax changes, the creation of companies, entrepreneurial activity and the growth of those companies. I know that Opposition Members take a slightly different view about what would be the best measures, but I am happy to reassure the hon. Gentleman about our intention. 
 The clause sets the corporate tax rate at 30 per cent. We are keeping it at that rate, having already reduced it twice since taking office. The amendment is an attempt at a Rooker-Wise amendment for corporate tax. I should like to offer the hon. Gentleman congratulations on his ingenuity, but I am not attracted to it and I will explain why. The amendment would introduce an annual programme of up rating the profit limits using a calculated entitlement to the small company rate and the starting rate of corporation tax. 
 The profit limits used to compute UK corporation tax are already high compared with other Organisation for Economic Co-operation and Development countries. We already have a higher level. Companies with profits of up to £1.5 million gain some benefit from the lower rates of tax, and how they interact with the 30 per cent. rate. It would have been possible for the Government to increase profit limits this year, and it is acknowledged that that would have had a positive effect on some companies, but not all of them and particularly not smaller ones. We are trying to consider how all tax rates work, in particular for small companies. 
 Instead, the Government decided that we would obtain greater benefit from reducing the tax rates than from changing the limit. As I have said before to the Committee, the Government favour ''targeting'' relief where they can, so that the economy can benefit to the greatest extent, rather than using blunt instruments such as a year-by-year increase in profit limits. 
 Apart from the fact that changing the rate is better than the mechanism proposed by the hon. Gentleman, because it maximises the benefits to the smaller companies, I also have technical objections. I am not 
 talking about whether the amendment is technically correct; I am talking about how the hon. Gentleman has constructed the amendment. At first sight, it seems that a requirement to upgrade the profit limit in line with inflation might seem reasonable. However, the inflationary adjustments in the hon. Gentleman's proposals are rounded up to the nearest £1,000 for the limits relating to the starting rate, or £10,000 for those relating to the small companies rate. I can understand why he may have done that, and I am sure that he will understand why I do not want to. However, the effect of rounding up the increase would be to increase the limits by five times the current rate of inflation. Having said that that was indexation, it is given a big push by rounding up. Every year, the amendment would mean that the profit limits would increase in real terms, leading continually to a real terms reduction in the amount of tax that companies pay. That may well be the hon. Gentleman's intention, but it is not the Government's. The Government intend that there should be fair levels of tax and we should look at that for all companies.

John Bercow: The Paymaster General's point about rounding up and its consequences is clear enough, and the Committee can make its own judgment of the merits of that point. It would be helpful if she were now to provide a specific example of the way in which the rounding up to which she objects operates in practice, so as to vindicate her point about an increase of five times.

Dawn Primarolo: I was intending to come on to that when showing how the formula would work in the legislation and how it would, therefore, change every year. It would cut straight across the principle of companies having certainty in their ability to plan what their tax rates will be.
 The rounding-up formula would be different every year. The boost that the rounding up would give would be much greater than the amendment appears to intend at initial sight and would be beyond what the Government consider necessary. The amendment would also make the relationship between the various profit limits unstable from year to year. That comes to the point that the hon. Member for Buckingham (Mr. Bercow) made. That is important for the computation of corporation tax reliefs on the relative amounts between each limit. If the amendment were accepted, there would be a required change in the fraction used to calculate the marginal relief. 
 This year, those fractions would have to be 209 over 4,000 and 341 over 12,000. Although I accept the principle that the hon. Member for Arundel and South Downs wishes to explore, I do not believe that his intention is to require legislation every year, automatically to change how all those limits are calculated and, therefore, to require companies to begin to engage in mathematical gymnastics over the planning of their liabilities. The amendment would 
 also mean that the calculations would be increasingly complicated year after year, as we sought to achieve the right balance. 
 I take the amendment in the spirit in which I hope it was intended. I think that the hon. Member for Arundel and South Downs wants to have on record, again, the Government's commitment to continue actively to scrutinise corporate taxation levels, whether for large or small and medium-sized companies. I think he also wants to ensure that the rules that interlock with the corporate tax rate continue to produce a highly competitive tax rate for British companies in terms of international competition—a point that we may discuss in later debates—and provide the certainty that our companies need in understanding their tax concerns. 
 On that basis, I hope that the hon. Member for Arundel and South Downs, while wishing to put on record that he favours that type of mechanism, will accept that although it looks good in principle, I am not attracted to it in practice. I am prepared to say that we will, of course, always continue to look critically at issues that are put forward, not least because the hon. Gentleman is very thoughtful and has, in previous Finance Bills, occasionally discovered things that we should have discovered, and which we went on to do. I hope that the Committee will not support the amendment if it is pressed to a vote.

Howard Flight: I thank the Paymaster General for her kind comments. I accept that a Rooker-Wise approach has its problems. The issue here is not just being internationally competitive; the basic issue is that if the favourable tax limits for small companies remain at a nominal sum, in real terms, they will reduce each year. I should be interested to know whether the Government have the obvious alternative in mind, which is simply to review the limits every year and potentially to raise them in nominal terms to keep up in real terms.
 The issue about rounding up was not included as a clever device, but merely for tidiness. To some extent, I take the point that it has its problems.

Dawn Primarolo: I am happy to put it on the record that the Government will continue to review how the tax rates are operating on an annual basis. We may take decisions that require no change for other reasons, but we do not intend to set up something that will wither on the vine.

Howard Flight: I thank the Paymaster General for her reply. The issue is that tax rates must not wither on the vine. Without further consuming the Committee's attention, I am comfortable that the underlying point has been taken. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Howard Flight: There is one aspect of the operation of corporation tax that I should like briefly to raise now and come back to in more detail when we address new clause 6, which has not been included with clause 30 for technical reasons. The issue concerns companies paying their corporation tax.
 Companies have presently to estimate the annual tax payable five and a half months before the end of the accounting period, and a failure to perform a reasonable estimate can lead to penalties being levied. That results in companies having to calculate their tax liabilities at least three times: once each for the payments in months seven and 10 of the accounting period and at least once for all payments after the end of the accounting period. That can be a costly administrative burden. Would it not be possible to consider arrangements that monitor a company's payments on account based on the prior year, unless there is reasonable evidence to show that the figure from the prior year is too high? As I said earlier, new clause 6 proposes a particular formula to deal with that. The regulations are in a statutory instrument, and a cost-saving approach that would not cost revenue would require some statutory changes. I am interested in the Government's view on achieving what I would view as common sense in that area, particularly when that has already been achieved for individuals.

Michael Jack: In advance of my remarks on corporation tax, I remind the Committee of my business interest as a non-executive director of a plc that pays corporation tax.
 I should be grateful if the Paymaster General were to comment either now or in writing on some interesting data on the impact of corporate taxation, and therefore the effect of the main rate as confirmed by clause 30, from the Inland Revenue statistics for 1997 and 2001. In 1996-97, the main rate of corporation tax was 33 per cent. At that time, the overall impact of corporation tax was 18 per cent. of net trading profits of UK enterprises and 13 per cent. of gross trading profits. If we move to 1999-2000 when the main rate was 30 per cent., which is the current situation that the clause seeks to confirm, the percentage of corporate taxation had risen to 22 per cent. of net trading profits and 16 per cent. of gross trading profits. 
 The Paymaster General made a very interesting comment in reply to an earlier amendment moved by my hon. Friend the Member for Arundel and South Downs in which she talked about fairness in the context of corporation tax. I wonder whether the Treasury was, in setting the main rate at 30 per cent., mindful of the impact on each sector of the economy, which has been confirmed by Inland Revenue statistics. 
 In 1996-97—a comparative period—agriculture, forestry and fishing paid 22 per cent. as a percentage of their net trading profits, and at that time the main rate was 33 per cent. Under the same main rate as we are being asked to confirm today, that figure rose to 24 per cent. During the same time, banking, finance and insurance rose from 20 to 28 per cent.; chemical 
 manufacturing, which is a sector that has been under particular pressure, rose from 15 to 18 per cent.; and distribution and repairs rose from 20 to 22 per cent. 
 Those figures tell us that having a main rate of 30 per cent. has created a situation in which tax take, as a percentage of net trading profits, has been increasing, although against the background of a decrease in the main rate of corporate tax in 1996-97. If we are to apply the criteria of fairness to such a hard-pressed sector as agriculture, which has been under particular pressure, we should consider that for it to find that the percentage take for net trading profits had risen would be worrying. The same message applies to manufacturing chemicals. I should be grateful for some commentary on and explanation of that phenomenon. With a decline in the main rate of corporation tax, and the confirmation of 30 per cent., those results are not what I would have expected.

Dawn Primarolo: First, I shall deal with the point made by the hon. Member for Arundel and South Downs on new clause 6 and instalment payments, which he mentioned in the margins of the Committee this morning. We will closely consider the principle behind the new clause when we come to it. As he knows, the Government have already closely considered the issues of payment of instalments and penalties for late payments. I do not remember the figures exactly, but we have considered reducing substantially the interest on late payments. The substantive debate will happen under new clause 6, and I am prepared closely to consider the hon. Gentleman's point and give him a response.
 In answer to the right hon. Member for Fylde (Mr. Jack), I do not have, after having leafed through my endless bits of paper, figures on a sectoral basis. He raised an interesting question however. A 10-year time sequence may also prove interesting. I cannot promise that I shall be able to get that information to him, but I shall do my best to provide an answer, which I shall ensure every member of the Committee receives. 
 I have the names and numbers of companies that fall into each category, and I am happy to put them on the record or send those details in writing to the hon. Gentleman. Some 340,000 companies pay no tax and make no profit; some 150,000 companies have a starting rate of zero, so their profits would be—[Interruption.]

Roger Gale: Order. I reassure members of the Committee that the Officers of the House will inform us if it is necessary to take any further action in response to the alarm.

Dawn Primarolo: I am reassured by that, Mr. Gale, because I did not know whether to carry on speaking or run for the door.

Roger Gale: Order. This Committee takes a Francis Drake approach to most things.

Dawn Primarolo: You mean the men will be first at the door, Mr. Gale?
 I shall start again, because I do not wish to give the information in a way that is not helpful to the right hon. Gentleman. About 340,000 companies are not recorded as making profits and they are rate zero. About 150,000 have profits up to £10,000 and their starting rate, once the Bill has been agreed, will be zero. About 160,000 will be in a marginal band of between one and 18 per cent., with profits ranging from £10,001 to £50,000. There will be 155,000 companies at the smaller company rate of 19 per cent., with profits ranging from £50,001 to £300,000. About 20,000 companies will be in the marginal band of 20 to 29 per cent., and 35,000 with profits of more than £1.5 million will be subject to the main rate of 30 per cent. That is the distribution of the 860,000-odd companies. 
 As I said, I do not have the figures the other way round. The corporation tax rates that have existed since 1979 have varied from a main rate of 52 per cent. down to the current 30 per cent. and from a small companies rate of 40 per cent. down to the current 19-plus per cent. For the past two years we have had the 10 per cent. rate as well, and this year a zero rate. Therefore, the spread is different. 
 If I can give the right hon. Gentleman a sensible breakdown, given the new corporation tax structure, I shall certainly try to do so and, with his agreement, ensure that every member of the Committee has that information at the same time.

Howard Flight: In accordance with my declaration on the Order Paper, I should declare an interest as a director of a company that pays tax. I apologise for not having done so in my opening remarks.
 On the issue of making advance payments, will the Minister focus particularly on the concept that there should be no penalties where instalment payments are wrong as a result of waiting on clarification of the tax treatment of an issue from the Inland Revenue? However, we can discuss that when we come to the new clause. 
 Question put and agreed to. 
 Clause 30 ordered to stand part of the Bill.

Clause 31 - Small companies' rate and fraction for financial year 2002

Howard Flight: I beg to move amendment No. 35, in page 22, line 5, at the beginning insert—
 '(1) An individual subject to income tax on profits or gains under Schedule D Case I or II shall be entitled to claim relief in respect of tax on those profits or gains which corresponds to the difference between the income tax otherwise payable and the corporation tax which would have been payable and the corporation tax which would have been payable by a company on such profits or gains taking into account sections 13 and 13AA of the Taxes Act 1988 (small companies relief and corporation tax starting rate), provided that:
(a) profits or gains in excess of the lower relevant maximum amount (as defined in section 13 of the Income and Corporation Taxes Act 1988) shall be disregarded for the purposes of calculating any relief under this subsection; and
(b) individuals in partnership shall be treated as if they were associated companies for the purposes of the said section 13; and
(c) such relief shall only relate to profits which have been retained within the relevant trade, profession or vocation. The Treasury shall have power under regulations to specify the situations in which profits shall be regarded as having been retained within a trade, profession or vocation.
 (2)'.
 As hon. Members may be aware, some 3.5 million self-employed people will see their national insurance charges go up about 14 per cent. following the Budget. As I understand it, if they were to incorporate—the amendment deals with quite low levels of turnover of about £30,000 per annum—there would be net national insurance and tax savings of about £3,000 per annum. I cannot believe that the Government want every small, sole trader business to incorporate itself. If nothing else, there would be the potential loss of revenue. I am also mindful of the fact that, ultimately, from a consumer point of view, the Government's legal position is stronger against a sole trader than against an incorporated business. 
 Amendment No. 35 has been designed to produce fairness in this area and to address the issue presented by the new improved small company taxation rating in conjunction with the changes to national insurance. It would give unincorporated businesses the option to retain profits and take advantage of the lower rates of corporate tax offered, instead of going through the hassle of incorporation. For partnerships, the bands at which lower tax would be paid are split evenly between the partners. That is designed to avoid the criticism that we are trying to help largely wealthy partnerships such as accountants. 
 The clear practical point is that for incorporated businesses, money comes through in wages and pay, on which income tax is paid. Similarly, the self-employed pay income tax, but if a self-employed business is able to retain profits to grow the business, it is fair and reasonable to provide for a parallel tax treatment to allow it to function on an incorporated basis.

Dawn Primarolo: I am sorry to disappoint the hon. Gentleman, but I am not attracted to this amendment, either. On the law of averages, I am sure that he will succeed on at least one amendment by the end of the Finance Bill—or more, if he is very busy and writes lots of them. However, I have not put down a challenge. I will consider very carefully the quality of the hon. Gentleman's amendments; he does not need to table them in quantity.
 As I explained when we debated the previous clause, the Government want to do all that they can to support businesses large and small and to encourage investment. However, the proposal in the amendment does not help achieve that. It seeks to compare the tax charged on a self-employed person and the amount of tax that would have been charged had the individual been chargeable to corporation tax. Like the previous amendment, it sounds like an attractive proposition, on the surface. However, it would ask small 
 businesses, their advisers and the Revenue to indulge in fantasy to construct an alternative, hypothetical version of reality, which would make it a bit difficult to write tax legislation. 
 The amendment asks what tax the business would have paid if it had been a company, subject to the corporate rules for reliefs, losses and so on. The answer to that question is not only complex but impossibly difficult because it depends on the real-world choices and decisions that would have been made in the alternative reality. The amendment attempts to treat companies and individuals as though they were the same. It ignores the fact that companies are distinct entities with a distinct legal status, and it amounts to a one-way bet: unincorporated businesses could choose to be taxed on the same basis as a company without taking on the obligations that go with corporate status. 
 The amendment is also a convoluted way of trying to benefit small businesses, which I absolutely accept is the hon. Gentleman's intention. Small, unincorporated businesses already receive appropriate incentives; for example, special rules for start-up businesses allow them to carry back losses in the first year of business against any income earned in the previous year, and investment incentives such as enhanced capital allowances that are available to companies are also available to unincorporated businesses. 
 At present, the amendment is not a priority for the Government, and it would be costly. It is difficult to work out how costly it might be because the amendment does not stipulate how the retained profits of unincorporated businesses would be measured. I know that many hon. Members will understand much better than I that that is a task fraught with difficulties because the concept of retained profit is not meaningful for unincorporated businesses. 
 As the amendment stands, I have said to the hon. Gentleman, ''No, thank you.'' I am not attracted to it and, if it is pressed to a Division, I would ask my hon. Friends to oppose it. However, the hon. Gentleman raises, as other hon. Members have in debates on previous Finance Bills, the difficult balance between being incorporated and unincorporated, and whether the Government are trying to drive companies to be incorporated through the tax system. Since 1997 the Government's policy has been to attempt to allow companies that choice—to be incorporated or unincorporated—and to put support in place for those companies where we can. Of course, that is not perfect, and it is difficult to do that. However, it is right for every Finance Bill, and we have had this debate during proceedings on every Finance Bill that I remember. It is important to keep the debate about what any Government do to keep that balance, at the forefront of consideration.

Mark Hoban: Is the Paymaster General aware of the depth of feeling among sole traders and unincorporated businesses about the growing fiscal advantages that there appear to be to incorporation? It would appear that for a sole trader with profits of £42,000 in 1996-97, the fiscal advantage
 of incorporation was about £1,400. In the 2003-04 tax year, it will be about £4,000. Many unincorporated businesses feel that the Government are trying to drive them towards incorporation. They do not wish to incur the additional costs of incorporation, but the tax regime is such that they feel almost obliged to do so because if they did not, they would be significantly worse off.

Dawn Primarolo: I am aware of the strength of feeling of some of those in the unincorporated sector about what they perceive as the advantages of incorporation, even though they do not choose that route for the structure of their businesses. All I can say to the hon. Gentleman is that the Government have looked carefully at that.
 We seek to strike a balance as best we can in not driving businesses into a particular structure. The balance is not perfect. The decisions that businesses take, the access they have to different relief and their structure are very much choices for them. We are not deliberately driving people into incorporation: we recognise the differences. I understand and recognise the strong feelings that are held by some in the unincorporated sector. As the Minister concerned, I continue to look carefully at that, and at how the tax system works for the different company structures.

Mark Field: The Paymaster General has made much in discussing the clause, and clause 30, of the policy of fairness that the Government have in relation to corporation tax. How is that driving of the system towards fairness compatible with the concept that she referred to in her response to my hon. Friend the Member for Fareham (Mr. Hoban), that there should be choice for different businesses?

Dawn Primarolo: The hon. Gentleman has hit the nail right on the head. I have had conversations and debates with the hon. Member for Kingston and Surbiton (Mr. Davey) and with the right hon. Member for Fylde on simplification and complexity in the tax system. In considering ways to improve the design of the tax system, there is not one exclusive thing that we could do. The pursuit of fairness alone might undermine certainty. The pursuit of certainty alone might undermine choice and flexibility. There must be a balance between certainty and fairness for the taxpayer and for all other taxpayers, because we take collectively as a society the decision all to pay our fair amount in the collection of the revenue that pays for our public services.
 We try to strike a balance between fairness, certainty and, where we can, simplicity, although simplicity is not always possible. We have anti-avoidance measures to try to ensure that people cannot circumvent the tax system. Of course, to return to the point made by the hon. Member for Cities of London and Westminster (Mr. Field), we are doing our best to balance the choices open to companies, depending on how they structure themselves. If the hon. Gentleman looks at the tax reforms that the Government have undertaken since 1997, he will see that we have been trying at all 
 points to take out of the system distortions that drive companies to take decisions based on tax rather than the decisions that they would otherwise take. I entirely agree that that is never perfect and not an exact science, but we have tried to allow companies to take decisions that will assist them, wherever possible. The Government also intervene on market failure. We are going for a broad-based, low-interventionist approach, but we intervene where there is market failure. Other clauses in the Bill are prime examples of that and we shall come to it later. 
 We have moved to a more academic discussion about how to balance all those underlying principles and deliver them in the broadest concept of fairness. That is the direction in which the Government are going, and each one of our reforms can be explained in those terms. 
Several hon. Members rose—

Roger Gale: Order. The Paymaster General has referred to the fact that this has already been quite a wide-ranging debate. That being so, I shall not be minded to have a stand part debate. I tell Members that now, in case there are other points that they wish to raise.

Howard Flight: Until the introduction of the stakeholder pension, the whole interaction between taxation and being incorporated or unincorporated left certain advantages to being unincorporated. The balance there was tilted that way, whereas other forms of taxation perhaps tilted it the other way. The coming of the stakeholder pension, with the ability, once incorporated, to take income by way of dividend and to use that to contribute to a stakeholder pension scheme for an owner and their spouse, has removed one of the obstacles to incorporation and made it more attractive.
 Looking at that purely in a pragmatic context, my understanding is that the self-employed are virtually lining up on the streets with their auditors to become incorporated. The amendment may or may not be the perfect way of dealing with the issue, although I think that its objective is pretty clear, but if the issue is not dealt with, I think that we will see a massive and undesirable rush, such is the significant fiscal value of being incorporated, towards the incorporation of businesses that would be better left as sole traders. The impact on the revenue might not be the same as the impact of this measure, but it would go some way towards it. 
 Unless the Paymaster General has something to say on how the Government intend to address that matter, and the underlying fairness issue, we would like to press the amendment to a vote as a signal. The situation is not sustainable. We do not want 3 million sole traders becoming incorporated and clogging up the system.

Edward Davey: I am grateful to you, Mr. Gale, for indicating that you will not allow a stand part debate, because I want to ask the Minister a question of fact, which relates partly to clause 32. The Red Book aggregates the cost of the measures in clauses 31 and 32. Table A.1 on page 154, item 5 under the heading, ''Supporting small businesses'' refers to:
''Corporation tax: reduce small companies' rate to 19 per cent and starting rate to 0 per cent'' 
and states that the cost will be £20 million in 2002-03, £265 million in 2003-04 and £450 million in 2004-05. The two polices have been grouped together in the estimates and for clarity of debate I want the Paymaster General to tell us what the cost is when those policies are separated so that we have the information when we vote on the separate measures.

Dawn Primarolo: I read about this specific point during the lunch break, but I cannot remember the answer to the question that I thought the hon. Gentleman might ask. Because of the complexity of the system, Mr. Gale, perhaps you will allow me to answer the question when we discuss the next clause, to which the question is also relevant. I do not want to avoid the question and do not think that I shall be allowed to.
 Question put, That the amendment be made:—
The Committee divided: Ayes 9, Noes 14.

Question accordingly negatived. 
 Clause 31 ordered to stand part of the Bill.

Clause 32 - Corporation tax starting rate and fraction for financial year 2002

Question proposed, That the clause stand part of the Bill.

Edward Davey: I did not participate in the previous debate on incorporation because my comments are particularly relevant to clause 32. Some of the comments made by the hon. Members for Arundel and South Downs and for Fareham apply in spades to this clause.
 The Government propose to cut the starting rate of corporation rate from 10 per cent. to 0 per cent., thereby increasing significantly the existing incentive for sole traders and self-employed people to incorporate. It is a huge increase in that incentive. I want to develop the argument and speak about the potential cost of the tax revenue lost. Calculations by the Institute for Fiscal Studies, and indeed a report in yesterday's Financial Times, suggest that the costs may be much larger than those estimated in the Red Book, so the debate is particularly important. 
 I shall begin by clarifying what is going on. At the moment, people have to choose between being self-employed and paying income tax on their profits and national insurance contributions at a reduced rate, or incorporating to create a company of which they are the only shareholder and employee, in which case they pay tax as normal on their salary and pay out profits to themselves in the form of dividends on which they may or may not pay corporation tax. [Interruption.] For the record, we can hear some interesting noises but I think that we are safe. 
 The measure will significantly change the tax question of whether to be self-employed or to incorporate. To illustrate that point with an example, by setting up a company a person would be able to pay themselves a personal allowance of £4,615 against income tax, and on top of that make profits of up to £10,000, which would be paid out in dividends, while facing no tax liability. As a result of the clause, a person who incorporates could earn £15,000 and pay no tax. Labour Members may want to reflect on the distributional issues raised by the measure. 
 The cost of the measure is relevant because the Committee is concerned with protecting the taxpayer. The Government have estimated the cost of the measure and, as I said in my brief intervention in the previous debate, that has been aggregated with the measure on the small companies tax rate in the figures that I read out previously. It is not clear, although I am sure that the Paymaster General will clarify this for us, what the Government estimate the cost of the specific measure to be. Assuming for the sake of argument that the cost of the measure is the whole of the figure in the Red Book—which is a heroic assumption, but let us make it—by 2004-05 the Government estimate that the cost would be £450 million. I should be interested to know how they arrived at that figure, or a lower figure of which the Paymaster General is about to inform the Committee. 
 I should particularly like to understand the assumptions about the number of corporations that will benefit. Have the Government assumed that that will consist of the current number of corporations because there will be no behavioural changes as a result of the measure? Have they made an assumption about an extra tranche of self-employed sole traders who will decide to incorporate? Have they assessed that in arriving at their estimates? If they have, how many sole traders do they estimate will incorporate? 
 As the Committee scrutinises the Government's policy, it is important to see whether they have got those estimates right. I want to dwell on that point 
 because of the work done by the Institute for Fiscal Studies. Through its analysis of the survey of personal incomes 1998-99, it says that 1.2 million self-employed people each stand to gain in excess of £500. 
 Sitting suspended for a Division in the House. 
 On resuming—

Edward Davey: Before we broke, I was saying that I was concerned that the Government's estimate of the cost of the measure was an underestimate. I was using an analysis prepared by the Institute for Fiscal Studies to back up my case. The institute had established that 1.2 million self-employed people stood to gain in excess of £500 a year if they incorporated following this measure. One might ask why it chose that figure. My guess is that it decided that that was a large enough gain to act as an incentive, in conjunction with the other incentives in the system. I am told that it is possible to incorporate at around £100, although I am not suggesting that everyone can incorporate at that low figure. Many other considerations are involved in such a move, as we discussed in the previous debate, not least the hassle and time of going through the process, but they are one-off costs. The clause relates to a one-off gain—a permanent gain in the tax system. Therefore, if anything, the IFS was fairly conservative in its choice of 1.2 million self-employed who might be attracted by the measure.
 The IFS tries to calculate the cost if 50 per cent. of the 1.2 million self-employed were to incorporate following the passing of the Bill. It estimates that the cost would be £1.2 billion, compared with the highest possible figure from the Government so far of £450 million. The institute also produces other costs estimates. If 75 per cent. of the 1.2 million self-employed who stand to gain more than £500 a year were to incorporate, the cost would be £1.9 billion; and if everyone in this community of 1.2 million self-employed were to incorporate, the cost would be £2.5 billion. That is the IFS estimate. 
 I am sure that the Paymaster General will agree that the Institute for Fiscal Studies is an independent and much esteemed body, which provides a great deal of useful research for our debates in this place. She may tell the Committee that its figures are incorrect and that it has got it completely wrong or that it has made a mistake in its methodology.

Roger Casale: The hon. Gentleman seems to be developing an argument based on the idea that, if we implement a certain tax measure, everything else will stay the same, but one must not assume that what in this case is a gain for self-employed people is necessarily in the longer term a loss to the Exchequer. The point of the measure is to promote enterprise and business, which will in the longer term lead to greater revenues and lessen the loss to the Exchequer from the immediate impact of the measure. Surely the hon. Gentleman will accept that the tax might have dynamic effects as well as an immediate impact.

Edward Davey: I cannot have explained myself fully enough. There will be no extra economic activity as a result of sole traders deciding to incorporate. It has no effect on the country's overall economic growth; it is simply the result of a tax change. Therefore, it is a net loss. There is no extra growth or economic activity to set aside, unless the Government are about to tell us that they have changed the laws of economics, but I doubt that the Paymaster General will tell the Committee that.
 Therefore, I disagree with the hon. Member for Wimbledon (Roger Casale). As far as I can see, the result is simply a net loss, which is what the Government estimate. My quibble is that the Government have made an underestimate, and that the Committee is being asked to agree to a tax measure that will cost the Exchequer far more than they think. It is incumbent on us to think carefully about that and probe the Government in case they have got it wrong. There is time to change, and to avoid money for our public services being lost.

Iain Luke: I take the point that sole traders may move in that direction, but people who operate in the black economy may also see the advantages of becoming legitimate and incorporated. Those people would benefit the Exchequer in a way that they have not done in the past.

Edward Davey: That is a valid point, but not one against the thrust of my argument. I doubt that the Government's estimate took into account a reduction in the size of the black economy—the Paymaster General may prove me wrong.
 I am going on the estimates of an independent body that is well renowned and well respected. It has considered dynamic changes, but not of the nature that the hon. Member for Dundee, East (Mr. Luke) suggested. The IFS considered the number of self-employed people available, the new incentive that could change their behaviour and move them towards incorporation, and what would happen if many of them took up that incentive. The IFS is describing not a static, but a dynamic picture. I want to probe the Government on whether they feel that their sums are wrong. 
 I will shortly conclude so that the Paymaster General can enlighten the Committee. If the Government are wrong, I would prefer it if they admitted it now. This is not about political point scoring but ensuring that the Exchequer gets the money it expects. If the IFS is right and the Government are wrong, we could see a questionable use of taxpayers' money—the hon. Lady would probably agree unless there is a policy objective that we have not heard about. Perhaps the Government want to give a lot of money to a certain group of people but have not got round to telling us. If that is so, we should debate whether that would be a sensible use of taxpayers' money. 
 Should the favoured group be in the business community or the community as a whole? Perhaps there is a policy objective for a group of businesses, but 
 does the clause address the best way in which to target money? Perhaps extra allowances should be given to the self-employed so that they do not have to tinker around with incorporation and can just receive money. However, perhaps the Government feel that incorporation has extra advantages for the wider economy, but will not tell us about them. Given the Paymaster General's response in the previous debate, I would not be surprised if she said that the Government were neutral on the issue. I do not believe that such declared neutrality is exhibited in the clause. 
 Distributional issues are related to the clause. When business people heard the Chancellor on Budget day, they must have thought, ''Great! Here's a pro-business measure.'' Labour Members should be aware that it could mean a huge tax cut for a particular group at a cost to the wider community, and that that could cause distributional issues. I shall remind them of the figures that compare a self-employed person with an employed person, each earning just under £15,000 under the regime. The self-employed person pays no tax, and the employed person pays—I am told by the Institute for Fiscal Studies—£3,827. That is a huge difference, which I am not convinced that Labour Members want.

Michael Jack: The hon. Gentleman made some of the points that I wanted to make because he and I read the same briefing from the Institute for Fiscal Studies. Therefore, I will not go over the points again, but I am intrigued, as he was, by the reason for that. There is no indication in the explanatory notes as to what the economic result is supposed to be—whether the amount is a small expenditure, as witnessed by the Red Book, or the much larger numbers to which the hon. Gentleman has rightly drawn the Committee's attention. The example that the Government use in the explanatory notes shows a company saving £875, which is the equivalent of £74 a month. Anyone would rather have than not have an extra £74 a month, but what would they actually do with it? I do not intend to give a detailed exposition of that.
 My first thought was that the measure was a sop to small and medium-sized companies for the extra burden that they will bear in national insurance charges. Obviously, for companies that are low on profitability but high on employability, it would be a drop in the ocean. I then wondered whether it had something to do with investment. The Paymaster General could have encouraged investment in the small and medium-sized sector in many different ways. It begs the question, why this way? 
 As the hon. Member for Kingston and Surbiton said, there is a friction between incorporation and unincorporation. He gave the example of a person on £15,000 who did not choose the incorporation rate having to pay £3,827. I noted the body language of the Paymaster General at that point. She was almost ready to explode with disagreement. If she disagrees with that calculation, I look forward to her demonstration of why the IFS figures are incorrect. 
 The Paymaster General used a very interesting term—''targeted help''—in her remarks on the previous clause. I wondered why she felt that the 
 companies at the lower end of profitability—the companies that would benefit from the measure—all needed help. One of the guiding principles of Government expenditure is to avoid a deadweight cost, if possible. I suspect that there is a lot of deadweight cost in the measure. Many companies might have been glad of some form of assistance, but through another route. 
 For example, in justifying their approach on oil taxation, the Government told us that they had enhanced first-year allowances for new North sea fields facing an additional 10 per cent. levy on corporation tax. The 100 per cent. write-off in year one was the key to inducing further investment and, by the magic of arithmetic, the Government tried to demonstrate to the Committee of the whole House that in some way companies would be better off. If that is a better way, why not visit that sum of money on enhanced allowances, for example? We do not have before us any form of compare-and-contrast analysis that would allow Parliament to decide whether the money is being used in the best way. The Government have decided on tinkering, to a certain extent. Someone with profit of £10,000 would get back £1,000 in monetary value. 
 What is the economic effect of using money in an across-the-board way as opposed to a more targeted relief, which the Paymaster General clearly favours? I should be grateful if she would give us some economic and business rationale and possibly agree to place in the Library the analysis—the Paymaster General looks pained.

Dawn Primarolo: The only reason that I look pained is that the right hon. Gentleman, who was a Financial Secretary in a previous Government, knows that certain elements of the modelling work that the Treasury undertakes cannot be disclosed. He implies that Ministers are withholding information that they could disclose. That is not the case, and he knows that he cannot plead for confidential Treasury information to be put in the Library. That is why I looked pained. I do my best to help him, but he stretches credulity.

Michael Jack: If I had been asking for detailed company-by-company information, I would entirely accept what the Paymaster General says. However, the idea that the Treasury cannot provide some rational explanation—[Interruption.] I am sorry, but I do not accept that. There must have been a way in which the Treasury decided that that, rather than other alternatives, was a good use of public money to achieve an as yet unstated policy objective.
 The Government are very happy when they believe that they have the justification to put on record gains such as economic growth or an increase in employment. The Paymaster General cannot have her cake and eat it. The Government are happy to put in the public domain, when things are going their way, the gains that they think can be made. It is different when I ask her in this Room to give a compare-and-contrast analysis of why this method has been chosen. If she simply said that the Government wanted to 
 reduce the level of tax on that company, that would be fine; I would respect that point of view, but if there are alternative reasons, Parliament should hear them. 
 I do not think it unreasonable to ask whether alternative ways of helping small and medium-sized enterprises were considered. Any reduction in taxation will leave more money with those companies but, using the arguments that I put forward on deadweight costs, there might have been a better, more targeted—to use the Paymaster General's own language—and therefore more appropriate way of using that money.

Rob Marris: I am confused by this debate, which I think is very important, because the hon. Member for Kingston and Surbiton talked about amounts of up to £2.5 billion. He cited some figures, as did the hon. Member for Fareham. I confess that I was a solicitor before I entered this House in June, not an accountant. I get confused on this debate because I do not quite understand the figures and I have not had the benefit of the briefing from the Institute for Fiscal Studies. For some reason, it did not see fit to send me one.

Edward Davey: It is on the internet.

Rob Marris: Right, but I have not had the benefit of it, so perhaps those who have will explain it to me. Let us take a simple example. I shall talk in round figures, because that is how my mind is working, and I stand to be corrected, because I am not an accountant. Ted's Window Cleaning, as a sole trader, turns over £15,000. My understanding is that Ted will pay low national insurance, although I am leaving that out of the equation for now. On his £15,000 a year, in round terms, he gets a personal allowance of £5,000 and, as a sole trader, he pays 22 per cent. on the £10,000, which is £2,200.
 If Ted decides to incorporate his window-cleaning company, that company has a revenue of £15,000 and employs Ted for £5,000 a year as an employee, with higher national insurance contributions. He gets that £5,000 in his pocket. He leaves the £10,000 in the company and because it is below the level, his company is not paying any corporation tax on it. The following month, after the year ends, his daughter announces that she is getting married. He says, ''I haven't got any money.'' She says, ''Yes you have, dad, you've got this company with £10,000 in the bank.'' He says, ''You're right.'' As the shareholder, he takes it out of the company. He has extended his income. Does he not pay 22 per cent. income tax on that? I shall give way, because I am standing to be corrected.

Howard Flight: He takes it as a dividend after the company has suffered the appropriate corporation tax on it and, as such, if he is paying only standard rate tax, there should not be any further taxation on it.

Rob Marris: I am grateful for that explanation. I am still not with it, and I stress that that may be my ignorance, but when Ted takes £10,000 out of his company, the company has not paid any corporation tax on it because it is below the threshold. He then has an income of £10,000 from the company—a dividend
 income as the shareholder. [Interruption.] Is the hon. Gentleman telling me that he pays no income tax on that?

Howard Flight: My understanding is—no doubt the Paymaster General can correct me—that because the company has paid whatever its corporation tax due is, the money paid out by way of dividend will qualify as a dividend that has suffered corporation tax. The recipient would pay further tax on such a dividend only if he were paying higher tax rates. This recipient would, therefore, not pay any further tax on that dividend.

Rob Marris: I confess that I am getting more confused. My local brewery, the Wolverhampton and Dudley Breweries plc—the largest independent brewer in the country, which makes good beer—pays corporation tax on its profits. If I were to have shares in it, and I stress to the Committee that I do not, and it paid me a dividend as a shareholder, having paid corporation tax, is the hon. Gentleman saying that I then do not pay income tax at all on that dividend, or that I only pay it if I am a higher rate taxpayer?
Mr. Flight rose—

Dawn Primarolo: I hope that the advice that the hon. Gentleman is giving my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) is free.

Howard Flight: It clearly depends on one's tax rate. Personal taxation on dividends is complicated. The Government's 10 per cent. credit is soon to be abolished. In simple terms, unless the hon. Member for Wolverhampton, South-West pays higher rate tax, which he does, he would not have a further tax liability that was material.

Rob Marris: I shall leave it there. The window cleaner in my example would not be paying higher rate tax. I shall leave it for the Paymaster General to explain further.

Roger Gale: Order. I am conscious that some extremely expensive advice is being offered free to hon. Members this afternoon, but I think that we had better come back to the matter in hand.

Dawn Primarolo: Thank you so much, Mr. Gale. I do not want to go down Ted's route at all, thank you.
 The clause provides for the starting rate of corporation tax from 1 April 2002 to be zero. About 150,000 small companies, and other corporation tax payers that have taxable profits of less than £10,000, will therefore pay no corporation tax. When the starting rate first took effect two years ago it was set at 10 per cent.-- the lowest rate for small companies in the European Union, and indeed among all major industrialised countries. About 250,000 small businesses—around 60 per cent. of all corporation tax payers—benefited from the starting rate directly or indirectly through the marginal rate.
 In his Budget statement, my right hon. Friend the Chancellor went further, saying that he wanted to send out the strongest signal about the importance that the Government attach to small businesses and the creation of wealth. The measure recognises that businesses growing beyond a certain size will often be companies. We believe that cutting corporation tax is an effective way of targeting support at small and growing businesses. It also encourages would-be entrepreneurs to set up new companies. 
 If we consider the Budget as a whole, in terms of where the Government are intervening to assist business, we see that there is a total package of measures assisting business worth about £1.6 billion. It goes from the research and development tax credit, to the cut in the small corporate tax rate from 10p to zero, to the reduction of administrative burdens on VAT and the introduction of the community investment tax credit. Each of those interventions will specifically help a part of the economy. 
 The hon. Member for Kingston and Surbiton asked about the figures in the Red Book. It is not possible to disaggregate the costs of the two cuts—I shall come on to the Institute for Fiscal Studies—because the 160,000 companies paying at the marginal rate will benefit from both the issues. The costings given in the ''Financial Statement and Budget Report'' take account of anticipated behavioural effects of some self-employed people converting their businesses into companies to take advantage of the zero and the 19 per cent. rates. That is in the calculations and explained in the FSBR. 
 The next set of issues concern the estimates. As a result of the zero rate, 150 companies will pay no corporate tax and a further 160 companies will pay less corporation tax. The estimated impact also takes into account likely significant or quantifiable effects on behaviour. The estimates have been made on the basis of the likely shift, but the economic rationale is clear. The measure is a targeted reduction in tax to help small and new companies thrive and grow. A great deal of activity has taken place to reform that area for entrepreneurs and growing companies. 
 Turning to briefing note No. 24 from the Institute for Fiscal Studies, I shall start by saying that it is an illustrious body, although why people should consider it to be more able than the full might of Her Majesty's Treasury has always puzzled me. It does a lot of very interesting work and puts out a lot of figures. Sometimes its figures are nearly right and sometimes they are spectacularly wrong. It puts out those figures in order to engender debates and tease out choices that are being made. When we introduced the working families tax credit, it published spectacularly large estimates of how much the child care tax element would cost. It was unbelievable how off beam those estimates were, and the Treasury was right. 
 An Opposition Member said that neither the IFS nor the Treasury always gets it right, which is true. We do our best to make forecasts on difficult issues. Let us examine how the IFS reached its £2.5 billion figure. It assumed that every single unincorporated business would move, given a theoretical gain of £500. That has 
 not happened, and we can question whether it will happen and whether we should expect it to happen. The IFS certainly has a different way of approaching behavioural impact analysis and, therefore, forecasting. 
 Some 78 per cent. of businesses—nearly 3 million of them—are unincorporated, despite the fact that there are already theoretical tax benefits for incorporating that would demonstrate to those companies that they could be better off. There is no shortage of tax advisers seeking to earn a fee from advising companies that that is the best way forward, but we have still not seen that change. The Government stand by their estimate in the Red Book of costs rising to £450 million. 
 Let me return to the point made by the right hon. Member for Fylde. The estimate is based on careful modelling of the impact of the measure that reflects the facts of real business behaviour, rather than dubious assumptions or sweeping decisions. As he knows, I cannot disclose the details of such modelling in the House of Commons. When he was a Minister the situation was the same, and analysis and calculations were not always revealed.

Roger Casale: One reason why the hon. Member for Kingston and Surbiton is so frightened by the modelling from the Institute for Fiscal Studies, which raises the spectre of a £1.2 billion price tag on the measure, is because it would use up most, if not all, of the extra penny that the Liberal Democrats want to put on income tax. Back in the real world, we should think not only about what we are going to spend money on, but how we are going to raise it in the first place.

Roger Gale: Order. Interventions must be both relevant and brief.

Dawn Primarolo: My hon. Friend made his point directly. The hon. Member for Kingston and Surbiton asked whether it would be justified to spend the money on something else. The Government have made the choice that the money should be spent to encourage the growth of smaller businesses and entrepreneurial activity. We note the estimates by the Institute for Fiscal Studies and also that they have been wrong in other estimates. We have checked our figures, and the costs in the Red Book are obviously the ones that we stand by. However, unless the hon. Member for Cities of London and Westminster does not want investment in the growth of companies, wealth and income for sustainable investment in public service over a long period--I do not believe that that is what Conservative Members are saying--the underlying issue is whether the Government have struck the right balance between incentives to incorporate and to remain unincorporated. If hon. Members are saying that we are perilously close to not striking that balance, we are not convinced. We are convinced that the balance is right, but we do not have a closed mind on that. Surely small businesses will not look a gift horse in the mouth. We want to create growth and economic activity, and to sustain entrepreneurial activity. That must be good for the British economy.

Mark Field: In view of the Paymaster General's profound statements about encouraging growth and targeting measures at entrepreneurs, will she tell us at what level of profits she wants businesses to incorporate. Presumptions have been made in the Red Book and we would be interested to have a broad view of the matter.

Dawn Primarolo: When I was in opposition, I heard Treasury Ministers say many times that it is unwise to go on the record with advice to businesses about decisions concerning their future. We set the rules to encourage growth and to ensure that the best choices are available, but the choices remain theirs.

Edward Davey: I hope that the Paymaster General realises that I made my comments in a balanced way when I asked the Government about their view. I seek an assurance that, if the provision is exploited in the way described by the IFS--that is, in a way that does not add to economic growth, but encourages a change in status to exploit the tax incentive--will the Government take action to stem the loss of tax revenue?

Dawn Primarolo: I did not say that the hon. Gentleman was unbalanced and I am not implying that--yet. I responded to him in a balanced way. If he is raising another point, he knows me well enough to know that the Government continue to cast an eagle eye on the way in which the tax system is used. We shall discuss later in the Bill measures to deal with unintended ways in which the tax system is being used and for which taxpayers should not sustain the cost. If the hon. Gentleman is asking me to be as vigilant in the future as I have been in the past, I can give him that undertaking.

Edward Davey: I am grateful for the Minister's helpful reply. I hope that she is right--

Dawn Primarolo: I hope that I am right.

Edward Davey: I am glad that the Paymaster General is so keen to ensure that the measure is not exploited. She should understand the effect that it would have if, in a year's time the IFS turns out to be even half-right and the Government decided to take action, because accountants would have spent a great deal of valuable time persuading companies to incorporate. If the Government then change, those companies would be free to try to unincorporate, but that would be an extra deadweight cost.
 While the Paymaster General is right to assure the Committee that she will be vigilant, she must be careful when she makes what the right hon. Member for Fylde called ''tinkering changes'' that she is not creating accountants' activity that serves no good, economic purpose. 
 Question put and agreed to. 
 Clause 32 ordered to stand part of the Bill.

Clause 33 - Employer-subsidised public transport business services

Question proposed, That the clause stand part of the Bill.

Howard Flight: I seek clarification from the Government about whether, under the provision for season tickets, there is an intent to permit travel on trains, trams or park and ride. If not, what is the logic of limiting the clause to public bus services, when I assume that the general objective is to get people out of their cars and on to public transport?

John Pugh: I hesitate to make any kind of contribution in such august company as this. I am on a learning curve, but I have a relatively simple contribution to make.
 Labour Members are very much in favour of a taxation scheme that modifies behaviour, and one that modifies behaviour and encourages environment-friendly behaviour is doubly welcome. However, and I do not make the accusation directly, the clause could smack of tokenism. 
 Statistics show—I have the advantage of being on the Select Committee on Transport, Local Government and the Regions—that there is no increase in the use of buses across the country except in London, with a marginal increase outside London. The projected increase in the Government's 10-year transport plan is small, so the growth in the bus network will be fairly minimal. I dare say that the change in taxation law will make some difference, although I do not think any Ministers pretend that it will make a massive difference. When one adds to that the future fall in the cost of motoring, an eloquent plea can be made for the exemption to be widened to take in all kinds of travel plans. 
 Why are trains not included in the clause? In the area where I live, most people who commute do so by train or through an integrated ticketing system that involves trains and buses. Why are coaches not included and, particularly, why not park and ride? That is essentially a bus scheme, which makes an enormous difference in many town centres. To incorporate it into the Bill would be an example of joined-up government. How would the Paymaster General respond to that suggestion?

Mark Hoban: I am sorry to amplify the point made by my hon. Friend the Member for Arundel and South Downs and also risk the Economic Secretary to the Treasury calling out ''Focus!'' during my remarks.
 The important aspect of the clause is its narrowness in referring only to subsidised bus services. Fareham will become the starting point of the South Hampshire rapid transit system, which is funded by Government money. At a time when the Government are trying to invest in other forms of transport to improve the road network and the public transport network in many 
 parts of the country, it seems odd that the tax incentive in the clause is limited to buses. Therefore, I encourage the Government to think again whether the clause could be extended to light railway systems to try to bring about some of the environmental benefits that we all want in densely populated parts of the country.

Michael Jack: I want to follow the contributions that have been made and put an anomaly to the Minister. A worker at BAE Systems in my constituency, who lived in Fleetwood, could take the Blackpool tramway to its terminus on the Fylde border and then transfer to a stopping bus. The odd situation would arise that the journey from Fleetwood to the edge of St. Anne's would not benefit from the provisions of clause 33, whereas the journey from St. Anne's to Warton, where he might go to work, would.
 The Government are reviewing several applications for public funding for the development of tramway systems or tramway and integrated light rail systems. If the measure's objective is to encourage the use of public transport—I notice that its emphasis is on local stopping services—it seems odd that travellers on local stopping tram services, which in many cases in Blackpool run on parallel routes to buses, get no help while bus travellers do. It would be interesting to hear from the Financial Secretary the reason for that apparent inconsistency and whether it is the intention of the policy.

Roger Casale: I take the point that the right hon. Gentleman made about trams. A tram link serves my constituency, connecting Merton and Croydon, and many business people use it. However, we have to start somewhere, and although this is a small measure, it is a very sensible one. I believe that it will encourage people to use public transport more and it is to be applauded. London suffers greatly from excessive congestion, which is a huge problem in my Wimbledon constituency, and the measure will help.
 I want to take issue with, or perhaps add to, the points made by the hon. Member for Southport (Dr. Pugh). The aim of the measure is not simply to change people's behaviour. Obviously, it gives people an extra incentive to use local transport if they will not be taxed for it, but we should not forget the measure's importance to business. Businesses recognise the significant costs to themselves of congestion in major cities such as London and the health costs attached to the pollution that congestion generates. Businesses have made many representations to the Government asking them to work through the tax system to encourage people to use public transport more. We must look to businesses to publicise the benefit to their employees, making them aware that they will not be taxed if they travel on local stopping services. Businesses should encourage employees to take up the benefit. 
 In a similar vein, perhaps we can look in a future Finance Bill at ways of using the tax system to encourage the use of school buses or other public transport by people travelling to school. It is people taking their children to school, especially between 8 
 and 9 am, that leads to most congestion in my constituency, creating a lot of trouble for people trying to get to work. 
 The measure is welcome and I hope that we shall build on it in future Finance Bills. It is about changing people's behaviour, but also about business, the Government and the community working together to reduce congestion in our cities for the benefit of everyone.

Mark Field: Reluctant as I am to engage in too much more special pleading—there has been some from all parts of the UK—a concern in central London is the potential impact of the congestion charge from next April. I want to understand some of the thinking behind the clause where it refers simply to ''public transport bus services''. Was any thought given to including private transport bus services, those that are employer-subsidised for large numbers of employees who have to go from one part of town to another? [Interruption.] They will all be included. I am glad that they have been covered.
 I return to the comments of my hon. Friend the Member for Arundel and South Downs. It strikes me that, to a large extent, given the environmental concerns that perhaps underlie some of the Government's thinking, buses can be among the worst offenders. It would be unwise, given the burgeoning growth in tramways, to exclude trams, if not trains, from the provisions of the clause.

Rob Marris: I echo the comments made about tram services. There is an excellent tramway in my constituency, and I seek the Government's reassurance that they will look at trams as well as buses.

Paul Boateng: The brevity of that contribution was a relief. I say that because my hon. Friend is not only a former solicitor with Thompsons—there could not be a more distinguished firm—but is also a former bus driver. I was expecting that Ted was either about to take a bus or subsidise his employee. I did not want to fall victim to Ted in quite the same way that my hon. Friend the Paymaster General almost did.
 Leaving Ted aside for the duration, the measure will allow employers to subsidise local bus services that are used by their employees to get to work, knowing that they can enjoy free or reduced-price travel, tax-free. As several hon. Members will know, it is a continuation of a process that began last year of encouraging a form of behavioural change. The hon. Member for Cities of London and Westminster made a specific point about bus services provided by employers. We are going further this year to encourage people to adopt what I believe Members of all parties agree is a desirable behaviour change, which will promote sound environmental objectives. 
 The hon. Member for Southport, who has just joined us, is much too modest about his own abilities in this area—he knows a great deal about the subject. I have been cross-examined by him in an appearance before the Transport Sub-Committee. I would be the first to concede to him that the measure is modest. As 
 I said earlier, it is a continuation of a process. Measures in previous Finance Bills have included, for instance, tax-free cyclists' breakfasts on cycle-to-work days, which was an even more modest assistance in changing behaviour, and tax-free lunchtime use of works buses—again, a modest contribution to changing behaviour and promoting good, sound environmental objectives. This measure is another step forward. 
 The tax exemption is limited to local stopping bus services. We believe that that is the most cost-effective way to benefit the majority of bus commuters, and there will be knock-on benefits to local residents who use the same routes. They are likely to be better served by more regular buses and, possibly, extra stops. The right hon. Member for Fylde, one of my predecessors as Financial Secretary, gave an example from his constituency of someone who started their journey on a tram and ended it on a bus. It is perfectly true that, unlike subsidy of buses, subsidy of trams will not attract the relief under the provision. Indeed, the provision is further limited in that the bus must provide a local bus service as defined by the Transport Act 1985. It must be available to the general public at separate fares. In the right hon. Gentleman's example, it would have to stop at least every 15 miles, so one could not get off a tram and get on a bus that went for 20 miles. That would be outside the definition.

Michael Jack: As usual, the Financial Secretary is giving us a clear and eloquent explanation for the move that the Government want to make. However, the tramway between Blackpool and Fleetwood meets the criteria that he has already enunciated and provides, in terms of a local stopping service, a parallel service to a bus operation because the road runs parallel to it. The man on the tram gets no help, but the man on the bus does. What is the logic?

Paul Boateng: I actually got that point, and I am about to come to it. I am afraid that I am not particularly familiar with the right hon. Gentleman's constituency, but I think that most Committee members have been to Blackpool and are quite familiar with Blackpool trams. I am familiar with the one that now runs on in the way that the right hon. Gentleman describes. I would be the first to accept that the measure currently does not apply to such tramways. Let me continue the explanation of how we came to the measure before dealing with the interesting point that he and several hon. Members have raised. It is worth examining in some detail.
 The measure was recommended by an academic team that carried out research on tax incentives for encouraging green travel to work. We undertook careful research before deciding that the tax exemption was a worthwhile measure. We commissioned professional researchers to interview about 2,000 employers. The Revenue had a consultation document on its website, which the hon. Member for Kingston and Surbiton might have seen in his surfing of the net. In the assiduous way that the hon. Gentleman speaks on such matters—

Edward Davey: On all matters.

Paul Boateng: It does feel like that, Mr. Gale, but there you are. It takes all sorts. The hon. Member for Kingston and Surbiton may have come across the website in his surfing, and may have given us the benefit—at some length, no doubt—of his views.
 What we found was that interested parties, having been given an opportunity to contribute, supported the measure. More than 50 individuals and organisations replied. The extended tax exemption is another modest, but important, step in our fight against congestion and traffic pollution. It will encourage employees to leave their cars at home. It will encourage employers to take advantage of the opportunity provided to make a real contribution not only to the environment, but the welfare of their employees and the immediate local community. 
 There is a point, which I think is sound and valid, that as we take such matters forward in a modest and incremental way, we should consider other forms of transport. I am perfectly willing to do so, having listened very carefully to the contributions made by my hon. Friends the Members for Wolverhampton, South-West and for Wimbledon in particular. They follow their constituents very closely in those matters. I am particularly persuaded by them that it would be right for us to look at the proposal and see whether there is scope to take it forward. 
 I hope that, with that assurance, hon. Members of all parties will give the clause a fair wind. 
 Question put and agreed to. 
 Clause 33 ordered to stand part of the Bill.

Roger Gale: In accordance with the order of consideration, we now come to clause 36, and will return to clause 34 afterwards.Clause 36 Exemption of minor benefits: application to non-cash vouchers

Clause 36 - Exemption of minor benefits: application to non-cash vouchers

Question proposed, That the clause stand part of the Bill.

Peter Luff: I had not intended to speak to the clause, but I wondered whether the Financial Secretary might tell me what it is about. The explanatory notes on the clause are not particularly explanatory. The summary begins,
 ''This clause'' and is followed by a series of sentences describing the clause. Under the heading, ''Details of the clause'', is written: 
 ''Subsection (1) adds a new subsection (3) to section 155ZB.'' 
That is the same wording as is in the summary, and both paraphrase the clause itself.

Edward Davey: Simplification.

Peter Luff: I hear the word ''simplification.'' Yesterday, or the day before, we voted in the House to rename the Joint Committee on Tax Simplification
 Bills the Joint Committee on Tax Law Rewrite Bills. I should like the explanatory notes to be written by Ministers in their own words.

Paul Boateng: We shall have to get our shop stewards in on that one. Let me assist the hon. Gentleman. The clause is small and technical.

Dawn Primarolo: And perfectly formed.

Paul Boateng: My hon. Friend the Paymaster General said ''perfectly formed'', but the hon. Member for Buckingham is not in his seat—but perhaps I am being unfair.
 The clause will ensure that the exemption under the minor benefits legislation applies where a ticket or voucher is used. In the Finance Act 2000, we introduced a power to exempt from tax minor employer-provided benefits by regulation. The clause ensures that the exemption covers a situation in which to obtain the benefit the employee must show or exchange a ticket or pass, for example, for a lunchtime journey on a bus provided by an employer. Were that not necessary, the issue could be covered by regulation, but where it is necessary, there must be primary legislation. 
 Question put and agreed to. 
 Clause 36 ordered to stand part of the Bill.

Clause 34 - Car fuel: calculation of cash equivalent of benefit

Howard Flight: I beg to move amendment No. 8, in page 23, line 10, at end insert—
'or, where expenditure on the car in question is first-year qualifying expenditure within the meaning of section 45D of the Capital Allowances Act 2001 (cars with low carbon dioxide emissions), £10,000'.
 The amendment is modest. It suggests that if the Government are earnest about wanting to encourage cars that use environmentally friendly fuels, they should make a special provision as an incentive for employers and employees, so that the arithmetic that calculates car fuel benefit is based on the smaller sum of £10,000, rather than on £14,000, for cars with low carbon dioxide omissions. That is joined-up thinking to make such incentives effective.

Paul Boateng: The clause introduces a new system for calculating the taxable benefit of free fuel provided by employers for private use by employees who drive company cars. It will help the environment, be easy for employers to implement and easy for employees to understand.
 If an employer provides free fuel for private use by an employee who drives a company car, income tax, which is payable by the employee, and class 1A national insurance contributions, payable by the employer, are due. Tax and contributions are calculated using flat rate charges based on the engine size of the car and whether it runs on petrol or diesel.
 A consultation document issued on 6 December 2001 set out three options for a new structure of the fuel charge from April 2003. All three options linked the new charge, in some way, to the CO2 emissions of the car. The responses to the consultation clearly showed that the preferred option was for the fuel scale charge to be determined by reference to the same percentage rate used to determine car benefit tax. It was recognised that such a system would be easy for employers to implement and for employees to understand, as opposed to one approach used for car benefit tax—after that part of the vehicle excise duty—and another one for the new charge. 
 Under the new company car tax system, introduced in April this year, the value of the car benefit is calculated as a percentage of the list price of the car. The appropriate percentage is based on the car's level of CO2 emissions. Employers will use that same percentage figure charge to work out the free fuel benefit charge when the new fuel scale charge comes into effect in April 2003. They will simply multiply it by a set amount--£4,400 in 2003-04--

Howard Flight: Fourteen thousand, four hundred pounds.

Paul Boateng: Fourteen thousand, four hundred pounds. The amount will be set at a level intended to ensure that the total tax collected overall for the next year does not increase in real terms. The complexity introduced there will ensure that there is no increase in the total tax payable. This new approach aims to make the system as simple as possible to administer, and it will be much simpler once the initial calculation has been made.
 In response to requests from business, we are also introducing a new system of apportionment when an employee permanently ceases to be provided with free fuel during the year. The current fuel scale charge is an all-or-nothing charge so that a single amount of free fuel in any tax year leads to imposition of the full charge for the year. As right hon. and hon. Members know, employees and employers are increasingly deciding that it is not worthwhile to provide free fuel. Previously, they would have been penalised for coming to that decision mid-year and that was deterring employers and employees from providing and receiving free fuel when that might have suited them. The clause will allow employees to stop receiving free fuel at any time within a tax year and to benefit from having the fuel scale charge reduced proportionately. They will be taxed only for the number of days in the year for which free fuel was provided. Our intention is to remove a barrier that hinders employers and employees in ceasing to provide and receive free fuel part of the way through the year. However, we must avoid abuse of the new easement. We do not want people opting in and out of free fuel when they go on holiday. If an employee receives free fuel again later in the same tax year, a full year's tax charge will be due. 
 The new fuel scale charge system will be more environmentally friendly and will encourage the use of cleaner cars by directly linking the tax charge to the car's CO2 emissions. It will be straightforward for 
 employers to operate, administrative burdens will be kept to a minimum, and it will be easier for employees to understand. 
 I hope that, having heard my explanation, the hon. Gentleman will withdraw his amendment. It would enable people to opt in and out whenever they go on holiday and I am sure that he does not want that. I hope that he feels that I have gone at least some of the way in addressing his concerns.

Howard Flight: The amendment merely ties together section 45D of the Capital Allowances Act 2001 and the new provision covering fuel. It would provide a dual incentive for employers to provide and employees to want vehicles with low carbon-dioxide emission. I hope that the public will understand the new system. My perception is that no one has a clue about it and everyone finds it very difficult, but perhaps they will understand it in due course.
 The amendment does not cover a major issue and the Government have decided not to accept it, so I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 37, in page 23, line 14, leave out subsection (3).
 The amendment addresses the Government's commitment not to keep changing the tables. It asks indirectly whether the Government are willing to guarantee that fuel differentials between road fuels, petrol and diesel will not be changed beyond 2004, to give manufacturers and fleet owners an assurance of consistency and ensure that manufacturers particularly who invest in new technology will not have the rug pulled from under them. There is an acknowledged lack of confidence in the Government maintaining differentials in clean fuels, as emerged in the debate on 19 October 2001, when the Minister effectively undertook that there would be no changes before 2004. 
 The amendment removes the Treasury's power to change the amounts in the tables. As I understand it, only Vauxhall and Volvo are investing money in liquefied petroleum gas technology. The longer there is no risk that the fuel duty basis on which such manufacturers are going ahead will suddenly be changed, the greater the certainty that they will get this new technology into production.

Edward Davey: I presumed that this interesting amendment was a probing amendment when I saw it on the amendment paper. From what the hon. Gentleman said, I think that is what he intends.

Howard Flight: Yes.

Edward Davey: If so, I am surprised at the way in which the hon. Gentleman puts the argument. It may be right that the Government should have this power, if they intend to increase the incentive for environmental purposes. We would welcome that flexibility. Therefore, I hope that the Financial Secretary, in
 replying to this short debate, will be able to say that the Treasury wants this power because it wants to improve the situation.

Paul Boateng: It would be very, very surprising if I were to rise to my feet and say that the Treasury did not want this power. It would also, for one good reason, incur the Paymaster General's substantial and much-to-be-feared wrath, because it would undoubtedly have an impact on future Finance Bills and the space taken up in them. She probably ventures to ensure that that does not occur, because we want to keep the Finance Bills as manageable as possible. [Laughter.] I hear a wry laugh coming from a sedentary position from those who would much better be quiet. The hon. Member for Mid-Worcestershire (Mr. Luff) will understand, concerned as he always is with the good management of Committees and the Finance Bill, that the amendment would mean that any future change to the multiplier used to calculate the value of fuel benefit could not be made by order. It would have to take up space in the Finance Bill, which cannot be sensible. We must be able to amend the fuel scale charge multiplier to reflect changes in pump prices and it seems sensible, over the years, to allow for changes to be made by a Treasury order. The current power has been used on a number of occasions in the past few years, and this year too, to amend the amount of the fuel scale charge, and I do not believe that great exception has been taken to it. The use of secondary legislation in this way is time honoured and perfectly sensible and I commend it to the Committee.

Howard Flight: This was a probing amendment and the issue was raised with me by the industry, reflecting Acts in other areas not far from the oil industry. We want manufacturers to invest in vehicles with lower carbon emissions such as LPG vehicles and do not want the rug then to be pulled from under them. However, there are points both ways, and I understand the Financial Secretary's response. The issue has been raised, and I think that it is worth talking to the industry about it if we want to get a move on. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 10, in page 23, leave out lines 35 to 37.
 Amendment No. 10 raises an issue that the Financial Secretary referred to earlier. Clause 34 introduces a welcome U-turn by the Chancellor, which I think that we raised when we debated the Finance Bill last year. When we changed the rule on car fuel tax last time, we debated the situation where an employee who received fuel for private use only in a single day, would be taxed as if he had the benefit for an entire year. 
 For reasons that I do not think the Financial Secretary has explained to my satisfaction, new subsection (6B) has the strange impact that if an employee starts a tax year with an exemption from the draconian tax but then matters change, through no fault of his own, he loses that exemption and collects an entire year's worth of tax again. I think that the 
 example that the Financial Secretary gave was one where the change was at the instigation of the individual. If the change in his circumstances was beyond his control, it seems quite unreasonable for him to be charged a whole year's worth of tax.

Paul Boateng: I have heard the point made by the hon. Gentleman. I must say that his amendment would allow people to opt in and out of free fuel on a whim. It would be possible for someone to take a decision on the basis that, for example, they were going on holiday. They could manipulate the system to some sort of advantage.
 We are keen to remove the all-or-nothing nature of the charge, which deterred employers and employees from ceasing to provide or receive free fuel part of the way through the tax year, were that most convenient to them. We are undertaking this measure to encourage more people to cease receiving free fuel. That is to help the environment. People tend to drive more miles, without thinking about whether they really need to, if no cost is attached. This clause provides for a proportionate reduction where free fuel ceases to be made available part way through the year.

Howard Flight: Many people change jobs during the course of a year. If someone moves to a new job where, for better or worse, fuel is provided part of the way through the year, this measure, if I understand it, will mean that they will end up receiving a year's charge. Is that correct?

Paul Boateng: That would be a serious disincentive and a serious distortion if it were the case, but it is not. I know that that will provide some reassurance to the hon. Gentleman. What we do not want is to enable people to opt in and out of free fuel within a tax year only to benefit from a reduced charge. We think it right that where provision recommences, a proportionate reduction ceases to have effect and the full year's charge applies.
 The question might be asked, why not have proportionate charges, regardless of the number of times someone decides to receive free fuel and subsequently opt out? We do not think that that would be a proper response to the issue. We want to discourage the sort of binge fuelling that I do not think anyone in the Committee would approve of. Cases of new jobs will not, however, be affected, because each employment is regarded as separate for tax purposes. People are unlikely to manipulate their jobs in order to get free fuel because that does not make sense. The hon. Gentleman can be assured that people will not be affected if they change their jobs in the way in which he has described. 
 With that assurance, I hope that the hon. Gentleman will not push his probing amendment to a vote, because its consequences would not be desirable for him or anyone else in Committee.

Howard Flight: The issue is not big enough to put to a vote, but the Financial Secretary may be aware that the Law Society is not confident that the wording is clear and is concerned about possible interpretations in the areas about which we have talked. There could
 still be minor issues of injustice, but I understand his objective and therefore beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 34 ordered to stand part of the Bill. 
 Clause 35 ordered to stand part of the Bill.

Clause 37 - Minor amendments to Schedule E charge

Question proposed, That the clause stand part of the Bill.

Michael Jack: I just rise to welcome in general terms the Government's decision to use clause 37 to advance the process of the tax law rewrite, which is a sensible and welcome development and one that I strongly support. I have one or two points to make later in the schedule, but I shall not make them at this stage. Suffice it to say that the clause is understandably modest and entirely compliant with the terms of the tax law rewrite.
 As the Paymaster General knows, the tax law rewrite has accumulated a further list of changes to tax law, and in particular to scheduling, that cannot be tabled in this clause because they are not compliant with the terms of the tax law rewrite. I should be grateful for some assurance that the Government will not lose sight of the wider improvements that the exercise is generating, and at some point in the future will see fit at least to comment on the proposals that have been accumulating in the various minutes of the tax law rewrite exercise to allow us the benefit of their opinion. My final observation is that although the exercise is extraordinarily welcome, before the Bill is out we might wish to take a further look at the whole question of complexity in the tax system.

Edward Davey: I wish merely to support what the right hon. Member for Fylde has just said. I wonder whether the Paymaster General has thought about reserving a part of the preparations for every Finance Bill for the tax law rewrite project to put forward proposals that would assist in that process. Perhaps she is effectively doing that, but I wonder whether that is included in the standard process that the Inland Revenue adopts to prepare for Finance Bills. If it is not, I wonder whether she will suggest that her officials go through that standard process.

Roger Gale: Order. I do not want to prevent the Paymaster General from responding if she wishes to do so, but that was irrelevant to schedule 6.

Dawn Primarolo: I shall respond briefly on the tax law rewrite. I am due to meet with representatives of the tax law rewrite just after the Bill ends, but the point was well made. The tax law rewrite project allows its representatives to rewrite tax law and not to change policy. As we saw on capital allowances, however, sometimes rewriting can throw up some issues. I am certainly prepared to take away the point that both hon. Members have made. As the body of work on the tax law rewrite builds up, we are interacting with the
 project better to facilitate its progress in that area. The partnership is growing and will be reinforced. I shall look at the points that both hon. Members have made and consider how we can take them forwards.

Schedule 6 - Minor amendments to Schedule E charge

Howard Flight: I beg to move amendment No. 15, in page 141, line 2, at end insert—
 '1A At the end of that section insert—
 ''(10) Where tax is chargeable on any gain under this section by reason of the exercise of any right then that tax shall be payable as if that gain had been made in the year of assessment in which the person concerned disposes of the shares acquired on the exercise of that right, and sections 202A to 207 inclusive shall be applied accordingly.''.'.
 As Committee Members may be aware, during the last Parliament three pieces of legislation concerned adding employer and employee national insurance contribution charges to unapproved share option schemes. When it was realised that the cash flow cost to younger, new economy businesses could be disastrous, because those companies could transfer the employer liability to the employee, we were left with unapproved share option schemes where the employee paid approximately 49 per cent. tax charge, which had to be paid on exercise. 
 Within the gambit of share option centred arrangements, there is the old approved scheme that is still subject to capital gains tax, which has been frozen now for more than 10 years, or there is the new enterprise management incentive share option scheme, which is extremely attractive if businesses can meet the fairly demanding qualifications, and have the time to spend money on a lawyer to implement it. The schemes overwhelmingly used are unapproved share option schemes because of the restrictions on the two above. 
 One of the aspects of the Chancellor's presentation and policy of which we approve has been his focus on entrepreneurship in the United States economy and his understanding of why better growth has been achieved, and what is needed to do that. Many measures have been introduced in that area. However, as the venture capital industry continues to complain, one area that is unsatisfactory is that of share option schemes. Such schemes are particularly intended to enable medium-sized businesses to recruit top-quality people who would otherwise work for bigger businesses at higher direct pay on a basis of less pay today and the hope of reward from share options in the future. 
 The changes to national insurance contributions have put the bill up further to about 53 per cent. net. That is extremely uncompetitive when compared with, for example, the overall US tax arrangements for approved share option schemes. The various bodies in the venture capital industry have put it to me that, at the very least, it might make sense to change the time at which the tax liability is paid to when the shares are sold rather than on exercise. As things stand, people 
 cannot achieve the objective of becoming a shareholder in the business. They have to sell the shares of unapproved options on exercise in order to pay the 53 per cent. tax. The net tax effect on the Revenue would be neutral, and many people may decide that they still need to sell because they would not want to run the risk that the value of the shares might fall if their tax liability was set by the value at the time of exercise. Amendment No. 115 would give the individual the option either to behave as he is forced to now—sell and pay immediately—or to own the shares and pay the 53 per cent. tax when he sells them.

Dawn Primarolo: We had a very short debate on the clause before considering the schedule. The amendment would change that schedule. I want to explain why we are proposing the changes. The provision is put forward in conjunction with the next tax law rewrite Bill, which is in schedule E. The focus of the amendment is that the rewrite considerations of schedule E to date have thrown up the need to make changes, which are covered in schedule 6. Those changes are to address anomalies or fill small gaps in schedule E legislation that would normally be outside the scope of the fix that the rewrite Bills can undertake but that, none the less, will greatly assist the rewrite. They cover such matters as share options, credit tokens, benefits in connection with the termination of employment, taxation of benefits where income is received free of tax and priority of changes between sections 148 and 595. The amendments about that matter are simply for tidying up.
 The hon. Gentleman seeks something entirely different in his amendment. It concerns not tidying up, but a new principle which would relieve the obligation of tax on the receipt of, in this case, shares.

Howard Flight: On the exercise.

Dawn Primarolo: No, it is not on the exercise. Perhaps I should explain what the amendment would do, why it is not possible and why it is perhaps not quite what the hon. Gentleman is speaking to.
 At the moment, if an employee obtains any asset as a direct result of their employment, it is taxable on its value at the time that it is received. For example, if a valuable oil painting is given to an employee as a reward for services, liability arises on the value of the painting at the time. The award of shares is no different where it is basically being paid as a salary—a payment—to an employee.
 The hon. Gentleman is discussing shares received outside an approved scheme, perhaps those paid as a form of salary sacrifice, which is a different way of paying them, basically to avoid tax—that is perhaps a less charitable way of interpreting the reason for paying them like that. If an employee who receives shares outside of an approved share scheme, which is when the tax liability that arises is different, those shares are taxable on their value in the year in which the award is made, not the year in which they are disposed of. Inside an approved tax scheme, the rules 
 are different. The Government have a wide range of approved schemes on offer, having undertaken extensive consultation with employers about the types of scheme that they want.
 The existing legislation puts an employee who has acquired shares through exercising an option granted by reason of their employment in the same position as one who is awarded the shares directly. Liability arises on any gain in the year in which the shares are received, through the exercise of the option. It would be wholly inconsistent and unfair to defer the assessment of a gain arising through the exercise of an option simply because the taxpayer chose to retain the shares rather than sell them. We are talking about unapproved schemes. 
 The amendment goes further. It wants the tax so chargeable to be deferred, but does not make it clear when that tax would become payable. Would it be on the disposal of the first share, on disposal of all the shares or not until the very last share had been sold? The amendment would operate so that, in effect, the payment of any tax arising could easily be deferred indefinitely. I am not attracted to that. I want to make it very clear that I am not attracted to an amendment that allows tax to be deferred indefinitely by the manipulation of how many shares have or have not been sold. 
 The amendment does not make it clear whether or how PAYE should be operated at the same time as the disposal of the share. The employer should know when an option is exercised, because he or she provides the share. It may be inconvenient to have to monitor employees to whom options are granted, although it is feasible, but how can an employer be expected to know, in time to operate PAYE properly, when an employee or ex-employee disposes of his shares? 
 I understand the hon. Gentleman's point, but such an amendment would not be acceptable. It would enable people to be paid in shares rather than a salary, not to be taxed on those shares when they are awarded and then to manipulate over an indefinite period the disposal of some or all of the shares, without the disposal ever incurring a tax charge. 
 Accurate as the hon. Member for Arundel and South Downs sometimes is, on this amendment I must say to him absolutely no, not under any circumstances. If he wishes to make further points about the disposal of shares, I shall be happy to consider them, but I shall ask my hon. Friends to vote against the amendment if the hon. Gentleman chooses to put it to the vote.

Howard Flight: I am surprised that the Paymaster General's reaction should have been thus, because she knows, and I specifically went through it, that the approved share option scheme is now extremely modest. Its usage is limited by the fact that it has a £30,000 maximum, frozen for the past 12 years and, as I said, usage of the EMI scheme is also extremely limited. The majority of businesses have to use unapproved share option schemes.
 In our previous sitting the Government boasted that the unapproved share option scheme regime in the United Kingdom was comparable with the US regime and argued that the Labour Government was as 
 friendly to enterprises as the US. That is not the case. Moreover, the situation has been worsened by the NIC charges, to an effective tax charge of 53 per cent. on exercise. 
 The Paymaster General made much of the fact that this was an arrangement to defer the tax. That is not so. The amendment refers to the disposal of shares. Whatever shares are disposed of, the tax charge would have to be paid on the bit acquired under options. 
 The object is simple. It is to get round the problem, which I should have thought the Paymaster General was aware of as it is making many of the entrepreneurs whom the Chancellor is trying to woo exceedingly upset with the Government, that people are forced to sell the shares that they acquire under unapproved share option schemes: they cannot afford to continue to have an ownership stake in the business that they are driving. The point of giving them share options is to make them perform. Therefore, the regime for what constitutes the overwhelming majority of share option incentivisation in the country is unacceptable and must be looked at. 
 The main area that constitutes fairness is the concept, as in the US, that the tax liability does not arise until the shares are disposed of. Indeed, in the US that is the case throughout in a more generous way than in this country. It is not a device. Moreover, to talk about share options as a form of pay is completely to misunderstand their purpose. The prejudice was based on the exploitation by certain individuals in privatised industries in the past. Share options may or may not be worth something as a result of what has happened to markets in the past three years. Most share options are substantially under water. Therefore, at the time of an award sum, they are in no way an alternative to cash in the bank. Clearly, they are there to lock in and motivate key management. 
 If the Government really are committed to entrepreneurial spirit, they must address the issue, not necessarily by the amendment. We would want to press the amendment to a vote out of principle, unless we get a more constructive response from the Paymaster General on an issue that is widely acknowledged, particularly among medium-sized businesses.

Dawn Primarolo: We have the lowest starting rate of corporation tax in the European Union; we have already discussed that. The UK has a range of extremely generous tax-advantaged employee share incentive schemes, other tax-efficient arrangements to encourage venture financing and the new capital gains tax business asset taper, which we have yet to discuss, to encourage long-term shareholding. In addition, we have one of the lowest income tax rates in the world. That combination of factors makes the United Kingdom an extremely attractive place for large and small businesses.
 I disagree with the hon. Gentleman, but it is entirely his prerogative to put the amendment to a vote—I would not argue with that for a minute. However, if he scrutinises what he has tabled and considers what he is 
 seeking to achieve, he will realise that he is creating a situation in which a tiny proportion will have an opportunity to do very well, but employee share ownership and the incentives in the rest of the tax system will be damaged—precisely what he said in earlier debates that the Government should avoid. After what has been a constructive debate through most of the day, I am very sorry that we should end with a failure to agree. However, we do disagree and I ask my hon. Friends to oppose the amendment. 
 Question put, That the amendment be made.
The Committee divided: Ayes 6, Noes 13.

Question accordingly negatived.

Howard Flight: I beg to move amendment No. 16, in page 141, leave out lines 20 to 24.
 The amendment seeks to remove paragraph 4 of the original schedule, which extends the scope of section 144A of the Taxes Act 1988. It seems that the Government are seeking to use the paragraph beyond the reasons for which it was originally intended. It was introduced in 1994 as an anti-avoidance measure and was part of the package to stop the type of abuse to which the Paymaster General referred earlier of paying executives in non-cash forms, such as gold, in order to gain a tax advantage outside the PAYE system. It provides that an employee is obliged to hand over the PAYE, which is due in 30 days, or is taxed as if in receipt of benefit, which means, in effect, that he is taxed twice. That provision was subsequently extended to share option gains. 
 There have been suggestions that section 144A of the Taxes Act 1988 is being used as a tax-collecting measure in its own right, which is beyond the original intention. Schedule 6(4) is a clear example of that stealth approach—it seems innocuous, but the effect could be to penalise the less well-off employee. The Law Society and various other bodies have raised that issue. 
 At present, a series of tax provisions for benefits apply only to what are called higher-paid employees—those who earn more than £8,500 a year. Unless things have changed, the Government propose that items covered under section 144A should count towards whether an employer is higher-paid. If a low-paid employee receives a non-cash benefit, such as a share option from his employer, the Government want to swoop down and charge him under the provisions that 
 apply to company directors—and until today, I thought that the Government believed that share options were a good thing. Non-cash benefits by nature are somewhat unpredictable in value and employers are unlikely to know in advance whether an employee falls under the heavier compliance regime for the higher paid. 
 Paragraph (4) adds to regulatory uncertainty for employers, and it is a mean-spirited attack on the lower paid. Using the word ''emoluments'' may also make the charge under section 144A liable to class 1A NICs.

Dawn Primarolo: I hope that I can reassure the hon. Gentleman that the clause will not do what he fears. He may then feel happy enough to withdraw the amendment.
 The Government are keen on approved share schemes, which is why we give so much tax relief—taxpayers' money—to encourage them. When the hon. Gentleman reads the record, he will see that we were disagreeing about whether some people should have complete relief on tax. 
 The amendment would remove paragraph (4) and leave section 144A of the 1988 Act as it stands. The hon. Gentleman concentrated first on whether greater value would be chargeable, and secondly on whether class 1A NICs would be liable. First, under section 144A, income tax is charged on certain amounts of employees' tax liability that have been met by the employer. Other employee benefits, such as payment of expenses or the provision of a company car, are treated as emoluments. Paragraph (4) brings benefits arising under section 144A into line with the legislation. There is only one consequence of that change: a section 144A benefit is currently left out of account in deciding whether an employee is earning £8,500 a year, although most employees with a section 144A tax charge are earning well above that figure. As the hon. Gentleman suggested, there is no way of bringing extra amounts into consideration. 
 Secondly, the paragraph does not change the national insurance position. There can be a class 1A charge only if there is no class 1 national insurance charge, and I am advised that there is a class 1 national insurance charge here. 
 In the case of an employee's tax paid by their employer, the Inland Revenue takes the view that the employee has received an advantage under sections 3 and 6 of the Social Security Contributions and Benefits Act 1992, and class 1 NICs are payable if a person does not reimburse their employer within the relevant period. That does not relate to class 1A as the hon. Member for Arundel and South Downs suggested. The position with regard to national insurance already applies and there will be no change to it. Re-labelling the benefit as an emolument would also not change it. 
 In the face of continuous, and very loud, calls from business to align the tax and national insurance rules where possible, I cannot see any reason not to align those particular benefits because that would not change tax or liability arising from class 1 national 
 insurance and the situation for employers will remain the same. I hope that I have put the facts clearly on to the record, and that the hon. Gentleman and the Law Society, which seems to be troubled by that point, are reassured. The point is exactly as it seems and there will be no change to the national insurance provisions that are currently operating. 
 On that basis, I hope that the hon. Gentleman will withdraw his amendment and think about the point again.

Howard Flight: I thank the Paymaster General for her response and her clear statement on class 1A NICs. Although I agree that there are not going to be many people earning £8,500 to whom these matters will apply, such a person would be brought into the regime of draconian penalties if they did not pay the PAYE on time. Other Members and I raised the point that although such people are in a minority, they are the people most likely not to know that they have such a liability. The Government should think about that.

Dawn Primarolo: Perhaps I did not put the point clearly. Section 144A applies to people who are on £8,500 or more, and by definition his concern about an attack on the low paid does not apply. Very, very, very few people, although I cannot say that there will not be any, who will be affected by section 144A would be considered to be low paid—I have to say that on the basis that I can never say never or none because somebody is bound to discover one such case. I hope that that description will help the hon. Gentleman.

Howard Flight: I thank the Paymaster General. The point that she confirmed was that the benefit would be included for the purposes of the £8,500 floor, which is a change from the past. I may be wrong, but a subtle change is going on here even though it may not affect more than a very small number of people. If my understanding is correct, it needs to be flagged up at the very least because self-evidently anyone of modest means who happens to get caught will be subject to an inappropriate degree of penalty out of ignorance. I take it that the Paymaster General is saying that the Government intend to communicate what this is all about so that the relevant employers will be absolutely clear. The issue is not major enough to press to a vote, so I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 6 agreed to. 
 Clause 39 ordered to stand part of the Bill.

Clause 38 - Provision of services through an intermediary: minor amendments

Howard Flight: I beg to move amendment No. 14, in page 24, line 35, leave out from 'payment)' to end of line 28 on page 25 and insert--
'in step Three of paragraph 7 after ''by the worker out of those emoluments'' add ''and deduct also all allowances and the effect of all reliefs to which the worker would be entitled were he the employee of the client in employment assessable to income tax under Schedule E''.'.
 Clause 38 applies to traders who have been penalised by the measure known as IR35, which the Government introduced in 2000. Among other things, this had the effect of taxing independent contractors as if they were employees and introduced a rather complicated method of calculating the tax due on their supposed salaries. 
 The clause somewhat grudgingly corrects some aspects of what was considered to be overkill in the IR35 approach. IR35 targets are given two exemptions that are available to ordinary full-time employees: mileage allowance and partnership expenses. We are pleased to see the provision, which is fair and reasonable, but the amendment would do the correct thing and provide automatic extension of all ordinary employees' tax benefits to IR35 targets. If IR35 individuals are to be treated as though they were employed, they should be covered by the same wider arrangements. Relevant areas include qualifying child care payments and personal incident expenses. The Government have been over-obsessed in principle with the IR35 territory and the amendment offers an opportunity to create a level playing field and provide IR35 individuals with the standard exemptions available to employed individuals.

Dawn Primarolo: The clause introduces three minor amendments to service company legislation. They are necessary to maintain fairness of treatment for employees and service company workers who work on terms similar to those of employees. We have published separately some amendments to deliver the same proposed changes for national insurance purposes.
 Our three proposed amendments fall into broad categories. First, service company workers will get the same relief that conventional employees receive under the new mileage allowance regime for business travel, which came into effect on 6 April 2002. We are not correcting something; we are extending new arrangements. Secondly, partnership intermediaries who reimburse certain allowable expenses to a partner will be able to claim relief for those expenses in the same way as a service company intermediary. Thirdly, service company intermediaries who cease trading during the course of a year will be able to claim appropriate relief in their final corporation tax accounts for the deemed schedule B payment that they are required to calculate under the service company legislation. 
 Taken together, this small package of changes ensures the continued fairness of treatment that the Government sought to establish between employees and people working through an intermediary or on similar terms to an employee. 
 Amendment No. 14 would replace a large part of the clause with a short form of words apparently seeking to put those affected by the service company legislation 
 and those who are directly employed on the same footing with regard to their entitlement to tax relief and allowances under schedule E. 
 I reassure the Committee and the hon. Gentleman that the amendment is not necessary. The service company legislation already entitles workers affected by it to the same tax reliefs and allowances under schedule E as those who are directly employed. The clause ensures that that remains the case and, as I have already explained, includes certain travel expenses, following the introduction of the new mileage allowance scheme. Therefore, the amendment would, at best, be unnecessary. 
 I must explain to the hon. Gentleman what the amendment would go on to do, in case he wants to press it to a vote. Contrary to its apparent intention, and I accept what the hon. Gentleman says, the amendment would undermine the treatment that it appears to try to guarantee. It does not need to guarantee it, because it is already there. 
 First, by stripping out the relevant cross-references to the mileage allowance rules, the amendment would deprive those affected by the service company legislation of the same entitlement to tax relief as a direct employee. It would strip away the parity that the clause puts in place. Secondly, by removing the section on reimbursed expenses, the amendment would prevent partnership intermediaries from being able to claim a deduction for expenses reimbursed to workers that a service company intermediary could claim. Therefore, not only is the proposed amendment unnecessary, but, unfortunately, it would impose on the intermediary companies an unfairness that it does not seek. 
 I accept what the hon. Gentleman said earlier: that the amendment was drafted to ensure parity. I have given him the undertaking that that is there. I have explained that on this occasion, in the best interests of saving the hon. Gentleman's reputation—[Hon. Members: ''Oh!'']—outside the House, I gently suggest to him that he should not press the amendment to a vote. He may wish to reconsider it, but if he presses it to a vote, he will damage the companies that he claims he is trying to help, and I am sure that he does not mean to do that.

Howard Flight: Specifically, I understand that while, the issue relating to partnership expenses has been addressed, the parallel problem that occurs when partners purchase capital assets has not been addressed, and they receive no relief in the IR35 calculation. Will the Paymaster General confirm that that is correct? If so, given what she has just said, do the Government intend to address that unfairness? If my drafting is as she says it is, I accept that, but the amendment's objective is perfectly clear and fair. I am glad to hear that she agrees with that objective.

Dawn Primarolo: The hon. Gentleman misunderstands the service company arrangements that were put in place last year. The purpose of the changes was to ensure that an individual who was an employee of the service company received all the rights of an employee. We wanted to prevent an individual
 from trying to get all the benefits of an employee and then, when they were clearly working in another company, receiving all those benefits too. We said, ''No, you can't have both. You must be one or the other.''
 The clause goes further and includes other reliefs, such as personal incidental expenses and qualifying child care. I am happy to confirm that, for want of a better way of putting it, IR35 workers can claim personal incidental expenses in the same way as a direct employee if they are direct employees and working for the service company. 
 The Chartered Institute of Taxation has also suggested that we might want to consider giving relief for appropriate child care cost. It is certainly a suggestion that the Government are prepared to examine in their wider consideration of child care costs. On the partnership asset issue, our view is that it is a hypothetical problem that has been put to us without demonstrating that it actually exists. Until it is demonstrated that there is a problem that needs to be addressed, as opposed to a hypothetical problem, why should we take up space in Finance Bills to deal with it? 
 The rights of employees in service companies are the same and those employees have the same access as any others. All we want is for them to choose which they 
 are, rather than claim that they are both. I hope that I have reassured the hon. Gentleman that the Government have absolutely no intention of preventing employees of service companies from getting access to all the rights that any employee would have.

Howard Flight: I thank the Minister for her comments, and her implicit assurance that if the partnership asset issue arises, she would seek to address that fairly. On the basis of her responses, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 38 ordered to stand part of the Bill.

Clause 40 - Treatment of deductions from payments to sub-contractors

Question proposed, That the clause stand part of the Bill. 
 Debate adjourned.—[Mr. Sutcliffe.] 
Adjourned accordingly at eighteen minutes to Six o'clock till Tuesday 21 May at half-past Ten o'clock.